Research and publications
A Predictive System with Heteroscedastic Expected Returns and Economic Constraints
We propose a variation of a predictive system that incorporates two (additional) economically motivated assumptions about the dynamics of expected returns, namely 1) their positivity, and 2) a time-varying volatility correlated with economic regimes. The implications of the modified system are consistent with well established empirical facts of stock returns, in particular, the simpler version of the modified system without predictors can explain the well documented countercyclicality of the dividend-price ratio’s predictive power.
Author(s):
Maxime Bonelli, Daniel Mantilla-Garcia
Summary:
We propose a variation of a predictive system that incorporates two (additional) economically motivated assumptions about the dynamics of expected returns, namely 1) their positivity, and 2) a time-varying volatility correlated with economic regimes. The implications of the modified system are consistent with well established empirical facts of stock returns, in particular, the simpler version of the modified system without predictors can explain the well documented countercyclicality of the dividend-price ratio’s predictive power.
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Register/Log in| Type : | Working paper |
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| Date : | 07/07/2014 |
| Keywords : |
Asset Pricing |
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